In a quarter in which equity markets seemed to be looking for reasons to be jittery, money markets took a more calm and collected approach. A bump in wage growth in January caused sharp volatility in stocks, but cash investors paid more attention to the Federal Reserve’s communication that other measures of inflation were still modest and that it likely would continue on a deliberate and slow tightening path. Its emphasis on continuity and data dependence took on extra significance in the quarter as the Fed came under new leadership with Jerome Powell succeeding Janet Yellen. In March, Chair Powell oversaw his first Federal Open Market Committee meeting and his first hike, as policymakers raised the target range of the federal funds rate from 1.25-50% to 1.50-75%. In announcing its decision, the Fed cited strong labor market conditions and robust business and consumer confidence, but noted consumer spending had moderated and inflation still remained below its target. Projections for steady growth in gross domestic product (GDP), inflation and employment contributed to expectations for a modest number of rate increases in 2018 and 2019, likely three in each. A brewing potential global trade war did not have a tangible effect on the money markets; however, they were significantly affected by a spike in Treasury issuance as government borrowing needs jumped due to tax reform, increased spending and a widening federal deficit. Issuance also was affected by the U.S. Treasury’s need to replenish its cash balance and pay back the Fed as the central bank ramped up the magnitude of monthly reductions in its balance sheet. Treasury officials indicated that a quarter to a third of the tapering repayments could be reissued as Treasury bills, adding to the supply at the front end of the yield curve. All of this pushed T-bill yields to strong levels, with the 1-month breaching 1.50% in late February. Throughout the reporting period, municipal issuers, state and local governments, and investors continued to examine the details and ramifications of the new tax code set into law in December as to what impact it may have on tax-free securities.

During the three months ended March 31, 2018, the 1-month London interbank offered rate (Libor) rose from 1.56% to 1.88% and 3-month Libor rose from 1.69% to 2.31%. The short end of the Treasury yield curve also increased over the quarter, with 1-month and 3-month Treasury yields rising from 1.25% to 1.71% and 1.45% to 1.76%, respectively.

The 7-day SIFMA Municipal Swap Index had a fairly volatile fourth quarter largely for the same reasons as it did in the final months of 2017: typical outflows relating to operations, excess supply of variable-rate demand notes (VRDNs) and the Fed tightening in March. The index fell throughout January from its elevated levels in December (ending 2017 at 1.71%), hitting a low of 0.98% in early February. It then stabilized until spiking in March to end the quarter at 1.58%. The 1-year MIG-1 fluctuated for the same reasons, beginning the quarter at 1.46% and ending at 1.63%.

Key Investment Team

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